State Budgets Will be Challenged Under House Republican ACA Plan

Eric Kim, Fitch Ratings comments on government shutdown
"This is unfortunately a movie we've seen a lot of times," said Kim. "For the most part and for state and local governments, we've not seen significant implications on the credit side and on the fiscal and economic side." 

WASHINGTON – The finances of states and health care providers could be hurt by the House Republican plan for repealing and replacing the Affordable Care Act, Fitch Ratings and S&P Global Ratings said in recent reports.

House Speaker Paul Ryan outlined the plan on Thursday for members who may be faced with concerns and questions from constituents during the recess next week.

Fitch released an analysis on Friday that said the House Republican plan's "broad outlines of Medicaid changes … could significantly challenge state budgets."

But Fitch director Eric Kim, who authored the piece, said important questions about the plan must still be answered, such as how and over what period of time the changes would be implemented.

Analysts in S&P's not-for-profit health care group – Martin Arrick, a managing director, and Kevin Holloran, a senior director – raised similar concerns in reports issued in January and November.

"We are very concerned that the ability of the federal government to fund the increased need for Medicaid in a recession would be compromised," Arrick said on Friday. "We are really concerned that if you go to a block grant program, the reimbursements to states will not keep up with the growth in costs over time."

"There will be lower payments to not-for-profit health care providers and over time that can erode their credit quality," Holloran added.

Kim said in his analysis that states generally now have significant flexibility to deal with fiscal challenges, including shifts in federal funding, while maintaining their credit quality. But the House Republican plan's proposed changes to Medicaid, which currently represents about one-third of state budgets, "could challenge even that flexibility."

First, the House GOP plan would end the Medicaid expansion and enhanced federal match into which 31 states and the District of Columbia have opted. These states and the district have provided funds to uninsured and low income individuals in return for enhanced federal funding matching rates, at 100% from 2014 through 2016, 95% in 2017, and then phasing downward to 90% by 2020 and thereafter.

The Health and Human Services Department estimates the states and district received $58.1 billion in federal funding to provide coverage to 9.1 million people in federal fiscal year 2015.

States will be forced to make a "pretty tough policy choice" under the House Republican plan, Kim said Friday. They will have to decide if they can continue covering uninsured and local income individuals, given that it will cost them a lot more money to do so.

Another concern is the Medicaid entitlement program. Currently, the federal government matches state funding, at rates of between 50% to 75%, based on personal income.

The House Republican plan would give states the option of getting funding with a per capita cap or through a block grant. That would shift a lot risk onto states, providers and enrollees, Kim said.

The Kaiser Commission on Medicaid and the Uninsured estimated that the budget resolution the House proposed last March, which was designed to start the repeal and replacement of the Affordable Care Act but was vetoed by President Obama, would have reduced federal spending on Medicaid by about $2.1 trillion or 41% over 10 years.

That could "require states to make significant budgetary changes," Kim said. "Medicaid changes that significantly reduce federal funding will cause states to consider a broad mix of revenue increases or spending cuts to maintain long-term fiscal balance."

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